DEMOCRACIES ARE generally thought to die at the barrel of a gun, in coups and revolutions. These days, however, they are more likely to be strangled slowly in the name of the people.Take Hungary, where Fidesz, the ruling party, has used its parliamentary majority to capture regulators, dominate business, control the courts, buy the media and manipulate the rules for elections. As our briefing explains, the prime minister, Viktor Orban, does not have to break the law, because he can get parliament to change it instead. He does not need secret police to take his enemies away in the night. They can be cut down to size without violence, by the tame press or the taxman. In form, Hungary is a thriving democracy; in spirit, it is a one-party state.

The forces at work in Hungary are eating away at other 21st-century polities, too. This is happening not just in young democracies like Poland, where the Law and Justice party has set out to mimic Fidesz, but even the longest-standing ones like Britain and the United States. These old-established polities are not about to become one-party states, but they are already showing signs of decay. Once the rot sets in, it is formidably hard to stop.At the heart of the degradation of Hungarian democracy is cynicism. After the head of a socialist government popularly seen as corrupt admitted that he had lied to the electorate in 2006, voters learned to assume the worst of their politicians. Mr Orban has enthusiastically exploited this tendency. Rather than appeal to his compatriots’ better nature, he sows division, stokes resentment and exploits their prejudices, especially over immigration. This political theatre is designed to be a distraction from his real purpose, the artful manipulation of obscure rules and institutions to guarantee his hold on power.Over the past decade, albeit to a lesser degree, the same story has unfolded elsewhere. The financial crisis persuaded voters that they were governed by aloof, incompetent, self-serving elites. Wall Street and the City of London were bailed out while ordinary people lost their jobs, their houses and their sons and daughters on the battlefield in Iraq and Afghanistan. Britain erupted in a scandal over MPs’ expenses. America has choked on the lobbying that funnels corporate cash into politics.In a survey last year, over half of voters from eight countries in Europe and North America told the Pew Research Centre that they were dissatisfied with how democracy is working. Almost 70% of Americans and French people say that their politicians are corrupt.Populists have tapped into this pool of resentment. They sneer at elites, even if they themselves are rich and powerful; they thrive on, and nurture, anger and division. In America President Donald Trump told four progressive congresswomen to “go back...to the broken and crime-infested places from which they came”. In Israel Binyamin Netanyahu, a consummate insider, portrays official inquiries into his alleged corruption as part of an establishment conspiracy against his premiership. In Britain Boris Johnson, lacking support among MPs for a no-deal Brexit, has outraged his opponents by manipulating procedure to suspend Parliament for five crucial weeks.What, you might ask, is the harm of a little cynicism? Politics has always been an ugly business. The citizens of vibrant democracies have long had a healthy disrespect for their rulers.Yet too much cynicism undermines legitimacy. Mr Trump endorses his voters’ contempt for Washington by treating opponents as fools or, if they dare stand on honour or principle, as lying hypocrites—an attitude increasingly mirrored on the left. Britain’s Brexiteers and Remainers denigrate each other as immoral, driving politics to the extremes because compromising with the enemy is treachery. Matteo Salvini, leader of Italy’s Northern League, responds to complaints about immigration by cutting space in shelters, in the knowledge that migrants living on the streets will aggravate discontent. Mr Orban has less than half the vote but all the power—and behaves that way. By ensuring that his opponents have no stake in democracy, he encourages them to express their anger by non-democratic means.Cynical politicians denigrate institutions, then vandalise them. In America the system lets a minority of voters hold power. In the Senate that is by design, but in the House it is promoted by routine gerrymandering and voter-suppression. The more politicised the courts become, the more the appointment of judges is contested. In Britain Mr Johnson’s parliamentary chicanery is doing the constitution permanent damage. He is preparing to frame the next election as a struggle between Parliament and the people.Politics used to behave like a pendulum. When the right made mistakes the left won its turn, before power swung back rightward again. Now it looks more like a helter-skelter. Cynicism drags democracy down. Parties fracture and head for the extremes. Populists persuade voters that the system is serving them ill, and undermine it further. Bad turns to worse.Fortunately, there is a lot of ruin in a democracy. Neither London nor Washington is about to become Budapest. Power is more diffuse and institutions have a longer history—which will make them harder to capture than new ones in a country of 10m people. Moreover, democracies can renew themselves. American politics was coming apart in the era of the Weathermen and Watergate, but returned to health in the 1980s.

Scraping Diogenes’ barrel

The riposte to cynicism starts with politicians who forsake outrage for hope. Turkey’s strongman, Recep Tayyip Erdogan, suffered a landmark defeat in the race for the mayoralty in Istanbul to a tirelessly upbeat campaign by Ekrem Imamoglu. Anti-populists from all sides should unite behind rule-enforcers like Zuzana Caputova, the new president of Slovakia. In Romania, Moldova and the Czech Republic voters have risen up against leaders who had set off down Mr Orban’s path.The bravery of young people who have been protesting on the streets of Hong Kong and Moscow is a powerful demonstration of what many in the West seem to have forgotten. Democracy is precious, and those who are lucky enough to have inherited one must strive to protect it.

Just as some of the world’s political leaders are adopting a go-it-alone attitude, the central bankers who gathered in Jackson Hole, Wyoming, last week are acknowledging the benefits of co-ordination and the downsides of pursuing purely domestic objectives. Facing trade and currency wars, they are concluding the best approach to monetary policy is to recognise that what they do — particularly at the US Federal Reserve — spills over to the rest of the world.For decades, monetary policy experts had believed central banks should focus on keeping their own houses in order. Floating exchange rates would absorb global shocks so that domestic employment and growth would not be significantly affected by developments abroad. Exchange rate moves would pass through to import prices, and the central bank could respond with rate moves to keep prices stable and growth near potential.That theory has gone helter-skelter in a world of growing trade tensions and international financial markets. Fed chairman Jay Powell acknowledged this in his speech in Jackson Hole when he highlighted the global factors affecting the US outlook, from threats of a hard Brexit to rising tensions in Hong Kong. International spillovers from monetary policy have been amplified by globalisation in recent decades. World trade has doubled as a share of global gross domestic product since 1970. The volume of gross financial flows has also shot up, speeding the transmission of financial shocks across borders. One of the biggest drivers of spillovers is the dominant role of the US dollar. Roughly half of international trade is invoiced in dollars, five times the US’s share in world goods imports and three times its share in world goods exports. This is partly because of the rise of global supply chains and network effects — it is easier to do business with firms using dollars if you use them too. Two-thirds of global securities issuance and official foreign-exchange reserves are denominated in dollars as well, largely driven by demand for safe assets. The largest effects are on emerging markets. A dominant dollar reserve currency works well in an environment of synchronised growth. But when the US economy outperforms, the Fed’s monetary policy stance shifts tighter and the dollar appreciates, hitting emerging markets disproportionately. A stronger dollar also raises import prices for trade denominated in dollars, pushing up inflation, even if supply and demand between trading partners has not changed. Dollar appreciation makes it more difficult for emerging markets to service their dollar-denominated debt. Fluctuations affect the risk appetite of global investors. Combined with country-specific issues, this drives capital flows in and out of emerging markets, amplifying their imbalances.But emerging markets are not the only ones hit by such spillovers. Hoarding of safe dollar assets has exacerbated a global savings glut, reducing investment. These factors have in turn pushed down the global long-run neutral rate — the interest rate that achieves stable inflation around the world. It exerts significant influence on domestic neutral rates and therefore anchors all policy rates, according to a paper presented in Jackson Hole. This makes it more difficult for monetary policy to diverge across countries without affecting exchange rates, current accounts, credit flows and growth. Accordingly, divergence in domestic monetary policy between the US, UK, Germany and Japan is now at its lowest point since 1960.We witnessed these spillover effects when the Fed raised rates in the most recent cycle. As rate rises kicked in with a lag, the share of the global economy growing below potential rose from about 67 per cent in early 2019 to 80 per cent today. This had a blowback effect on the US, as weaker demand from abroad contributes to softer growth and inflation domestically.Central bankers are split on what to do about disruptive spillovers. One option is to incorporate them into their planning and pursue a degree of international policy co-ordination, but this is politically tricky. Another option is to reduce the dominance of the dollar. Bank of England Governor Mark Carney suggested a new global electronic currency controlled by central banks. But the technology for this does not yet exist.Expect the debate to continue. Central bankers have discovered what the politicians deny: globalisation has gone so far it cannot be turned off. With slower global growth and fewer tools to respond to the next recession, they can’t avoid being their neighbours’ keepers. The writer is a senior fellow at Harvard Kennedy School

- Investor from ‘The Big Short’ is worried about passive funds - ‘The longer it goes on, the worse the crash will be’

For an investor whose story was featured in a best-selling book and an Oscar-winning movie, Michael Burry has kept a surprisingly low profile in recent years.But it turns out the hero of “The Big Short” has plenty to say about everything from central banks fueling distortions in credit markets to opportunities in small-cap value stocks and the “bubble” in passive investing.One of his most provocative views from a lengthy email interview with Bloomberg News on Tuesday: The recent flood of money into index funds has parallels with the pre-2008 bubble in collateralized debt obligations, the complex securities that almost destroyed the global financial system.Burry, who made a fortune betting against CDOs before the crisis, said index fund inflows are now distorting prices for stocks and bonds in much the same way that CDO purchases did for subprime mortgages more than a decade ago. The flows will reverse at some point, he said, and “it will be ugly” when they do.“Like most bubbles, the longer it goes on, the worse the crash will be,” said Burry, who oversees about $340 million at Scion Asset Management in Cupertino, California. One reason he likes small-cap value stocks: they tend to be under-represented in passive funds.Here’s what else Burry had to say about indexing, liquidity, Japan and more. Comments have been lightly edited and condensed.

Index Funds and Price Discovery

“Central banks and Basel III have more or less removed price discovery from the credit markets, meaning risk does not have an accurate pricing mechanism in interest rates anymore. And now passive investing has removed price discovery from the equity markets. The simple theses and the models that get people into sectors, factors, indexes, or ETFs and mutual funds mimicking those strategies -- these do not require the security-level analysis that is required for true price discovery.“This is very much like the bubble in synthetic asset-backed CDOs before the Great Financial Crisis in that price-setting in that market was not done by fundamental security-level analysis, but by massive capital flows based on Nobel-approved models of risk that proved to be untrue.”

Liquidity Risk

“The dirty secret of passive index funds -- whether open-end, closed-end, or ETF -- is the distribution of daily dollar value traded among the securities within the indexes they mimic.“In the Russell 2000 Index, for instance, the vast majority of stocks are lower volume, lower value-traded stocks. Today I counted 1,049 stocks that traded less than $5 million in value during the day. That is over half, and almost half of those -- 456 stocks -- traded less than $1 million during the day. Yet through indexation and passive investing, hundreds of billions are linked to stocks like this. The S&P 500 is no different -- the index contains the world’s largest stocks, but still, 266 stocks -- over half -- traded under $150 million today. That sounds like a lot, but trillions of dollars in assets globally are indexed to these stocks. The theater keeps getting more crowded, but the exit door is the same as it always was. All this gets worse as you get into even less liquid equity and bond markets globally.”

It Won’t End Well

“This structured asset play is the same story again and again -- so easy to sell, such a self-fulfilling prophecy as the technical machinery kicks in. All those money managers market lower fees for indexed, passive products, but they are not fools -- they make up for it in scale.”“Potentially making it worse will be the impossibility of unwinding the derivatives and naked buy/sell strategies used to help so many of these funds pseudo-match flows and prices each and every day. This fundamental concept is the same one that resulted in the market meltdowns in 2008. However, I just don’t know what the timeline will be. Like most bubbles, the longer it goes on, the worse the crash will be.”

Bank of Japan Cushion

“Ironically, the Japanese central bank owning so much of the largest ETFs in Japan means that during a global panic that revokes existing dogma, the largest stocks in those indexes might be relatively protected versus the U.S., Europe and other parts of Asia that do not have any similar stabilizing force inside their ETFs and passively managed funds.”

Undervalued Japan Small-Caps

“It is not hard in Japan to find simple extreme undervaluation -- low earnings multiple, or low free cash flow multiple. In many cases, the company might have significant cash or stock holdings that make up a lot of the stock price.”“There is a lot of value in the small-cap space within technology and technology components. I’m a big believer in the continued growth of remote and virtual technologies. The global retracement in semiconductor, display, and related industries has hurt the shares of related smaller Japanese companies tremendously. I expect companies like Tazmo and Nippon Pillar Packing, another holding of mine, to rebound with a high beta to the sector as the inventory of tech components is finished off and growth resumes.”

Cash Hoarding in Japan

“The government would surely like to see these companies mobilize their zombie cash and other caches of trapped capital. About half of all Japanese companies under $1 billion in market cap trade at less than tangible book value, and the median enterprise value to sales ratio for these companies is less than 50%. There is tremendous opportunity here for re-rating if companies would take governance more seriously.”“Far too many companies are sitting on massive piles of cash and shareholdings. And these holdings are higher, relative to market cap, than any other market on Earth.”

Shareholder Activism

“I would rather not be active, and in fact, I am only getting active again in response to the widespread deep value that has arisen with the sell-off in Asian equities the last couple of years. My intention is always to improve the share rating by helping management see the benefits of improved capital allocation. I am not attempting to influence the operations of the business.”

Betting on a Water Shortage

“I sold out of those investments a few years back. There is a lot of demand for those assets these days. I am 100% focused on stock-picking.”

So far, with his flashy lifestyle, the US president has been a resounding inspiration to many consumers and investors. But his personal narrative is unlikely to survive an economic downturn, because people pull back during such periods and reassess their views and the stories they find believable.

Robert J. Shiller

NEW HAVEN – US President Donald Trump concluded his remarks at the recent G7 summit by inviting the assembled leaders to hold next year’s meeting at his Doral country club near Miami, describing a fantasy-like world of “magnificent buildings” whose “ballrooms are among the biggest in Florida and the best.” It was yet another instance of Trump’s public narrative, which has been on a rising growth path for nearly a half-century.

One can observe this by searching Trump’s name in digital news sources, like Google Ngrams. His narrative has been slow to grow by contagion, but it has been growing for a long time, such that his domination of public discourse in the United States almost seems implausible.Part of Trump’s genius has been to pursue for a lifetime the features that have sustained narrative contagion: showcasing glamor, surrounding himself with apparently adoring beautiful women, and maintaining the appearance of vast influence.Trump had firmly embraced this career strategy by 1983, when an article in the New York Times entitled “The Empire and Ego of Donald Trump” reported that he was already, in that year, “an internationally recognized symbol of New York City as mecca for the world’s super rich.”Consider his interest in professional wrestling – a form of entertainment that attracts crowds who by some strange human quirk seem to want to believe in the authenticity of what is obviously staged. He has mastered the industry’s kayfabe style and uses it effectively everywhere to increase his contagion, even going so far as to participate in a fake brawl in 2007. Trump had the good luck to be invited to host a new reality television show in 2004 called The Apprentice, which featured real-life business competition. He immediately saw the opportunity of a lifetime to advance his public persona, becoming famous for a tough-love narrative. “You’re fired!” he would bark at losers on his show, while also showing some warmth to winners and losers alike.Now that Trump has established a contagious narrative, he continues to live out his TV show persona. At the Republican Party’s 2016 convention, after portraying the US as a declining power, he declared, “I alone can fix it.” Accordingly, he has fired his top officials at an unprecedented rate, ensuring that no one of independent stature remains part of his administration. This has established a new form of arbitrariness in the US government, the Trump whim, which, given the linkages of the US and global economies, can affect the entire world.None of this is original. Trump has been pursuing a variation on a recurrent narrative that dates back thousands of years. The ancient cynic Lucian of Samosata, in a second-century essay on oratory, “A Professor of Public Speaking,” describes to would-be leaders how one can exploit a power narrative by acting it out in one’s own life:“ ... In your private life, be resolved to do anything and everything, to dice, to drink deep, to live high and keep mistresses, or at all events to boast of it even if you do not do it, telling everyone about it and showing notes that purport to be written by women. You must aim to be elegant, you know, and take pains to create the impression that women are devoted to you. This also will be set down to the credit of your rhetoric by the public, who will infer from it that your fame extends even to the women’s quarters.”For Lucian, this narrative does not describe reality, but creates it. What matters is not substance, but consistency:“Bring with you, then, as the principal thing, ignorance; secondly recklessness, and thereto effrontery and shamelessness. Modesty, respectability, self-restraint, and blushes may be left at home, for they are useless and somewhat of a hindrance to the matter in hand … If you commit a solecism or a barbarism, let shamelessness be your only remedy.”Of course, in an era when people usually did not live as long as they do today, Lucian could not have imagined that one could plan to maintain narrative consistency for 50 years. But nor can such a narrative be sustained forever. And the end of confidence in Trump’s narrative is likely to be associated with a recession.During a recession, people pull back and reassess their views. Consumers spend less, avoiding purchases that can be postponed: a new car, home renovations, and expensive vacations. Businesses spend less on new factories and equipment, and put off hiring. They don’t have to explain their ultimate reasons for doing this. Their gut feelings and emotions can be enough.So far, with his flashy lifestyle, Trump has been a resounding inspiration to many consumers and investors. The US economy has been exceptionally “strong,” extending the recovery from the Great Recession that bottomed out just as Barack Obama took over the US presidency in 2009. The subsequent US expansion is the longest on record, going back to the 1850s. Ultimately, a strong narrative is the reason for the US economy’s strength.But motivational speakers often end up repelling the very people they once inspired. Witness the reactions of students at Trump University, the fraud-based school its namesake founded in 2005, which shut down by multiple lawsuits a half-decade later. Or consider the sudden political demise of US Senator Joe McCarthy in 1954, after he carried his anti-communist rhetoric too far. There is too much randomness in Trump’s management of the presidency to make persuasive predictions. He will surely try to stick to his public narrative, which has worked so well for so long. But a severe recession may be his undoing. And even before economic catastrophe strikes, the public may begin paying more attention to his aberrations – and to contagious new counternarratives that crowd out his own.Robert J. Shiller, a 2013 Nobel laureate in economics, is Professor of Economics at Yale University and the co-creator of the Case-Shiller Index of US house prices. He is the author of Irrational Exuberance, the third edition of which was published in January 2015, and, most recently, Phishing for Phools: The Economics of Manipulation and Deception, co-authored with George Akerlof. His forthcoming book is Narrative Economics: How Stories Go Viral and Drive Major Economic Events.

Chris Reilly, managing editor, Casey Daily Dispatch: Marco, I know you’ve been doing a lot of traveling this year… uncovering the biggest opportunities in the blockchain space.In June, you went to the UNCHAIN Convention in Berlin. You also attended the Crypto Valley Blockchain Conference in Zug, Switzerland.What was the vibe like over there?Marco Wutzer, senior analyst, Disruptive Profits: It was buzzing with activity. This year’s conference drew 1,200 attendees, 300 companies, and had 150 speakers.One of the things that was surprising to me is how deeply banks are already involved in the blockchain space.They have to be. Or risk getting left behind.Multinational Dutch banking giant Rabobank is one example. As I learned, it will soon offer a real-time “blockchain bank account” to its millions of customers.So the way I see it, it's probably going to look a lot like when online banking came out.Initially, only a few banks had it, but eventually, more and more banks used it. Nowadays, I don't think you can survive anymore with online banking. Who goes to a bank branch anymore these days? It's all online.And I think with the blockchain bank account, it will be a similar thing. As soon as a few banks come out with it, and the retail users get familiar with buying tokens, then at some point all the banks have to do it.Otherwise, they'll no longer be competitive.Rabobank is just one of the banks that I learned in detail about what they're doing. But I would imagine that many other banks and brokerages are working on similar things. So I think over the next few months we will see that roll out in quite a few countries from quite a few institutions.Chris: In your July issue of Disruptive Profits, you said, “Central bankers are dead men walking.” Can you get more into that? Marco: Well, the trend is clearly towards a decentralized future. And this is something where piece by piece, little by little, central bankers will become completely irrelevant over time.Because once we reach a critical mass where people, companies, and banks realize the benefits of the trustless, decentralized nature of the Blockchain Ecosystem, at some point, it will no longer be feasible to work with fiat currencies. Because if you look at the history of fiat currencies, all of them have failed. All of them. And even if you look at the U.S. dollar, it has lost 90%-plus of its value already.Right now, a lot of the third-world countries and emerging markets have really, really crappy currencies that are really not worth anything outside of their borders. They fail so often that we will very soon reach a point where people are used to using crypto tokens. We’ll get to a point where launching a new fiat currency will become a futile endeavor. People will just stick with the crypto tokens.And so, slowly but surely, this will then roll out across the globe. And, of course, this is a process that will take decades. So we're just in the very, very beginning of this. But it's interesting to see how the central bankers come to a small little crypto conference, and these are central banks running hundreds of billions and trillions of dollars’ worth of assets. They come to little crypto conferences to see what's going on and to interact with the people. They actually think they will be relevant in the future.Chris: You say this is a process that will take decades. Is there anything big happening in the space as we speak?Marco: Yes, one thing that I think will happen fairly quickly is the security tokens.The Blockchain Ecosystem is made up of five layers. The first four layers – hardware, core, blockchain, and protocol – make up the ecosystem’s infrastructure.Beyond the infrastructure is the token/asset layer.The token/asset layer will eventually become the biggest one, as more and more assets become tokenized, meaning they’re represented on blockchains.And now, Security Token Offerings, or STOs, are a new trend that will soon take off and become huge.This new trend is picking up, and it needs to be on our radar as the ecosystem builds out.All existing securities like stocks and bonds will become tokenized.There are already many security token platforms where you can issue a token that then represents an asset, which could be a company, a royalty stream, or a piece of real estate. Any kind of asset, really. And this was something where I was surprised to see how many asset managers and people and companies were interested in the space. People were at the Crypto Valley Conference specifically for that.So this is one of the spaces within the world of blockchain that will pretty much take off next year, as we get more regulatory clarity and these platforms mature just a little bit more.There is a lot of demand for it, and it will bring a lot of liquidity to assets that are not that liquid now. So it's marginally better for things like real estate because it improves the process a lot. But it brings all kinds of things, like niche assets from any kind that are not easily tradable, like royalties, entertainment royalties, art, collectible cars, and stuff like that.It will get to a point where even small businesses can be tokenized and you can own shares in iconic buildings, little corner stores, or even a food truck. So the whole space is about to take off. It's all starting to come together. Chris: That sounds like a huge development in the space.Marco: It is. And another thing…On the conference’s networking cruise, I had a long conversation with a Geneva-based Greek investment advisor.Now, this is not just some small-time wealth manager. He’s advising Greek shipping magnates. These are ultra-high-net-worth individuals…And he is looking to get his clients positioned in STOs.I talked to many asset managers that either work for or advise institutional investors. They were all trying to figure out the best way to invest in security tokens.In other words, eventually these asset managers will want to own a part of the infrastructure that powers the security tokens they are buying now.Institutional money moves slowly, step by step. Eventually, they will make the full transition from the legacy financial system to the Blockchain Ecosystem.Overall, I got the impression there is a tidal wave of institutional money waiting to enter the space.Chris: Very exciting. It sounds like we have a lot to look forward to from blockchain technology.Marco: Yes, definitely.Chris: That’s all for today. Thanks, Marco. We’ll talk soon about the latest developments.Marco: Sounds good, Chris.

Chris’ note: As we’ve shown you, Marco’s no stranger to spotting the best opportunities to profit from blockchain technology. And he believes he’s found the next breakthrough in the space… one that will deliver early investors a fortune.It all has to do with a deadly flaw in America’s national security. A tiny, $10 million company is developing a solution to this problem… and it could disrupt a $2.9 trillion market. This would open the door for a potentially life-changing payday.

These days, examiners are much less inclined to put lenders in a ‘penalty box’ to prevent them from growing

Brooke Masters

Since US regulators loosened the Volcker rule that bans banks from engaging in proprietary trading, reactions have been starkly different.Banking lobbyists downplay last week’s changes to regulations designed to prevent banks from using insured deposits to make risky short-term bets. They say the changes reduce fiendishly complex compliance rules that make it hard for bankers to do their main jobs of making markets and providing services to clients. As a result, they say, the rule change should boost liquidity in the debt markets, which would make them more resilient in case of a downturn.The industry argues that higher capital requirements for trading in general — more than three times pre-2008 levels — will prevent a repeat of the financial crisis. “The largest US banks are not prop trading now, and they will not be prop trading tomorrow,” says Kevin Fromer, who heads the Financial Services Forum, which represents the biggest US banks.Consumer groups and some regulators see the Volcker rule change quite differently. The new version cuts the pool of financial instruments covered by the rule by at least one-quarter, according to a regulator who voted against the change. It not only frees banks up to take more short-term bets but also reduces the documentation requirements, opening the door to more risky trading. Critics also point out that if banks find ways to trade on their own account, rather than for clients, it could reawaken the poisonous conflicts of interest that flourished ahead of the 2008 crisis.“Banks didn’t spend nine and a half years and tens of millions lobbying to get these rules changed if they didn’t want to do prop trading and it wasn’t going to return them many multiples on what they spent,” says Dennis Kelleher of the advocacy group Better Markets. The Volcker rule rewrite is part of a much larger shift under US president Donald Trump, who came into office promising to kill two regulations for every new rule he put in place. Supporters and opponents agree that he has far exceeded that ratio. Acting budget director Russell Vought boasted this summer that “we’ve hit 13 to one”, adding that the eliminated rules had saved taxpayers $33bn.Liberal groups keep running lists of the rules and regulations Mr Trump’s administration has watered down or scrapped. This month alone, according to the Brookings Institution, there are seven entries and the Volcker rule hasn’t been included yet. They include weakening the Endangered Species Act, reducing penalties on automakers who fail to meet fuel efficiency standards and rejecting a ban on chlorpyrifos, a pesticide linked to developmental and autoimmune disorders.In the financial sector, this change in attitude has led the US Federal Reserve to scrap one prong of its annual stress tests and ease the requirements for midsized banks to write “living wills” that lay out how they could be wound down in a crisis. A new rule requiring brokers to act in the “best interest” of their clients is seen as much less strict than a scrapped Barack Obama administration proposal that would have imposed a “fiduciary duty” on advisers.Industry insiders also say that the tenor of their interaction with government supervisors has changed. These days, examiners are much less inclined to put banks in a “penalty box” that prevents them from growing over anti-money laundering issues and other “matters requiring attention” (supervisor speak for “you need to fix this”). In some senses, this is par for the course. The US historically pingpongs between fits of regulation and spasms of deregulation, often depending on who is in power. The American system is also blessed — or cursed, depending on your perspective — with activist state officials who club together to try to counter overarching trends. Republican attorneys-general tried to block Obamacare; now Democratic attorneys-general are challenging Mr Trump’s environmental policies, launching antitrust probes of big technology companies and trying to stop mergers that federal regulators have approved.The combination of US loosening and state tightening echoes the mid-2000s, when George W Bush’s administration was dismantling environmental rules and declining to rein in hedge and mutual funds, while state officials led by Eliot Spitzer were using their enforcement powers to try to counteract him. (Yes, the biggest bank deregulation law passed under Bill Clinton, but Mr Bush continued the trend.) That era, as you may recall, ended with the collapse of Lehman Brothers in 2008. Back in 2019, the US is still subject to much stricter global capital and liquidity requirements, put in place after the crisis, as well as much of the Dodd-Frank financial reform act. And there is no evidence that America is suffering for it. The industry reported record 2018 profits and the US economy is still outpacing most of the developed world.But fears of a recession are rising and there are concerns about the swollen leveraged loan market. It seems like a good time to reinforce our financial defences rather than weakening them. Remind me, why exactly are we deregulating the banks right now?

The quotas on western investment into Chinese financial markets are no longer the main limiting factor on inflows

By Mike Bird

If we open it, they will come. Or so the logic of the Chinese government goes, when it comes to Western investment in its financial markets. That dream is unlikely to become reality.On Monday, the State Administration of Foreign Exchange, or SAFE, abandoned the ceiling on its two Qualified Foreign Institutional Investor programs, scrapping the total quota limit of $300 billion.It’s easy to see why the news sounds like some major liberalization: the system of limiting foreign investment has been in place since 2002, when it was implemented with a $10 billion ceiling. That limit was gradually increased, reaching $300 billion earlier this year.But actual investment quotas allocated through the system have long been well below the ceiling. At the end of 2018, shortly before the cap was last raised, SAFE handed out $101 billion in QFII quotas, two thirds of the $150 billion limit. At the end of August, investment quotas allocated to QFIIs totaled around $110 billion.

Since 2014, the Stock Connect system linking Hong Kong and mainland markets has become a popular way for foreign investors to buy Chinese assets, sapping some activity under QFII. But even then, offshore demand doesn’t exactly look rapacious: net inflows into the Shenzhen and Shanghai stock exchanges via the tool have amounted to around 156 billion yuan ($21.93 billion) so far in 2019. At the same point in 2018, the total ran to 222 billion yuan.Chinese financial authorities might want to consider why investors overseas haven’t maxed out the previous limits. Skepticism about a volatile stock market that has risen by almost 20% in the last decade, and where sentiment-driven trading rules the roost, may be a bigger factor than Beijing’s arbitrary limits on inflows.When it comes to outbound investment, Beijing’s view is less “Field of Dreams,” and more “Hotel California.” Western capital can check in any time it likes; Chinese capital will be lucky if it gets to leave. No equivalent announcement was made about the Qualified Domestic Institutional Investor program, which allows Chinese institutions to buy foreign assets. Rather than numerical quotas, funds cannot invest more than a certain percentage of their assets abroad.Investments under QDII have risen, but slowly. At the end of August 2015, $89.9 billion was approved through the system. Four years later, it was $103.3 billion. The majority of such permissions to invest elsewhere are allocated to Hong Kong, meaning more exposure to China for the investors. Nearly two thirds of the sales of constituent companies of the Hang Seng Index are made in mainland China.Liberalization means more than just dropping the floodgates: the quality of the investments on offer matter too. Without more fundamental changes to make Chinese assets more attractive—like improved corporate transparency and less administrative interference when markets behave in ways Beijing doesn’t like—it’s hard to see this latest move generating much more than attention.

Every generation believes it’s different than those that came before. Then, reality sets in.

By George Friedman

Recent polls have shown that millennials are less patriotic, less religious and less interested in having children than previous generations. Many seem fascinated with the concept of millennials, believing that they are extraordinarily unique and the forerunners of fundamental shifts in the way we think and live. Given the attention that has been paid to this age group, it’s important to examine it with some care.

The term “millennial” applies to those born between 1980 and 1996. The oldest millennials are now approaching 40, while the youngest are 23. It is difficult to think of those in their early 20s and those about to turn 40 as being part of the same generation. Not only has the former group lived almost twice as long as the latter, but more important, they are at different points in their lives, one just entering the job market filled with a sense of self-worth and the other having worked for 15 or 20 years and discovered the limits of self-worth.

A generation is an arbitrary concept. Each stage of life is characterized by certain attitudes toward politics or culture. Millennials, for example, are generally thought to be progressive, yet the very definition of how a millennial lives and thinks is in its own way peculiarly biased by class, race and nationality, among other things. A 30-year-old American working for Goldman Sachs in New York experiences life differently than a 30-year-old housemaid in Georgia. And both experience life differently than a 30-year-old living in Tibet or Namibia.

Generations are meant to be global classifications, but the experience of being 30 is very different depending on the place in which one lives and class to which one belongs. Even if we confine the discussion to the United States, there are vast differences between people belonging to the same generation depending on geography, economic circumstances and so on.When people speak of millennials, I get the sense that they’re referring to college graduates, working flexible hours and playing video games while toying with the idea of socialism. Such people are certainly included in this group, but it must be remembered that 70 percent of high school graduates enter college and only about 60 percent of those who start college actually graduate. That means that less than half of all millennials finish college, which means that more than half of the generation is experiencing a very different life than the stereotype might represent.

I’m a member of the baby-boom generation that was regarded much the same as the millennials are now, as an extraordinarily unique group that would change everything and could not be understood by those who were older. We were perhaps best characterized by lyrics from a Bob Dylan song: “Come mothers and fathers throughout the land and don’t criticize what you can’t understand.”

This is true of all generations, some with more justification than others. Each generation encompassed a vast array of differences, and more important, each generation changed as they grew older. The baby boomers thought they had developed a new theory of sexuality accompanied by mind-liberating drugs.

That, at least, was how they were seen, although the vast majority did not get invited to the party.

Our adolescence and young adulthood was filled with arrogance and certainty. We then married and reinvented our parents’ lives – which we swore we wouldn’t do. We disappeared into the joys and tedium of having children, and when we came out of that, as with our parents, we discovered that we were no longer young or cool and that we were caught in professions that carried with them their own agony. I remember living in New York City in the 1960s and thinking that what we were doing there had never happened before, only to discover that our lives were a repeat of the endless drama of being human. By now, the oldest millennials have learned that lesson, as have those who never got to participate in the myth of the millennial.

This was all understood before the modern Enlightenment. Plato and the Bible are filled with the eternal process of life. But the Enlightenment introduced the concept of progress, the idea that humanity is on a path to perfection and that every generation stands on the shoulders of the preceding one, seeing more and farther than before. At the heart of this knowledge was science and technology.

These were the critical benchmarks of the evolution of humanity.

We live in a culture created by the Enlightenment. The ancients used to regard age and wisdom as linked. The Enlightenment turned time into something more.

Those who came later may not have been wiser, but by definition, they were more knowledgeable about nature, science and technology than their parents.

Rather than seeking the wisdom of age, they cherished the knowledge they had and conceded the irrelevance of those who were older. The proof for this was the development of technology that previous generations didn’t have.

Millennials are the latest in a line of generations from the past century, all of which were assumed to be bringing new ways of living and thinking, things that Dylan said their parents couldn’t understand. The things they bring are certainly new but not always better. I still insist that the Blackberry was far better than the iPhone. But then, it is the role of a baby boomer, which had to be the coolest generation of all time, to cede the field to the new cool generation, which all too soon will be replaced by the next generation.

There really is no such thing as a millennial. Differences in ages, cultures and classes make it impossible to fit so many people into one group. The baby boomers too were a myth. Many forget that those who fought in Vietnam were also boomers, yet they didn’t fit into the widely accepted definition of a boomer.

The danger in the concepts of boomers and millennials is that they create an illusion about what the future will hold. They imagine that the dreams of 20- and 30-year-olds will come to fruition. And these concepts exclude so many members of those generations who never have the opportunity to dream the dreams of the mythical generation.

What we want our lives to be and what they will be are very different. All the polls that ask millennials what they want now will reveal the dreams we all had before the reality of life set in. But one thing is certain. In another generation, the children of the millennials will laugh at the primitive video games of their parents and the idea of social media, promising that this time, it will all be different.

Jared DillianSince I started this 10th Man bond series, you guys seem to be split broadly into two camps.On one side, there are people who remain anti-bonds. Or at least, anti-investing-more-in-bonds.On the other side, there are the “yes, but” folks, who get why it’s important but feel blocked from doing much about it, for different reasons.Anyway, as I said last week, we’ll be throwing you a lifeline soon. I’m working on something pretty important that is a) going to make bond investing a lot easier and b) be beneficial even if you’re anti-bonds (yes, really).For now though, let’s continue with an article based on a question I’m getting from lots of you: how would you build a bond portfolio?

Best Practice

The best way to build a bond portfolio is to start by thinking about the risks.A portfolio of bonds can go down, you know.Yes, I know that US Treasurys cannot technically default (or at least, they haven’t so far). But they can decline in price, and the decline can be substantial.For example, if long term interest rates go up a lot—say 2% or so—the price of a 30-year Treasury bond could drop by as much as 40%. That’s a scary number. Most people aren’t worried about that right now. They may be someday.So we are definitely concerned about the direction of interest rates, known as duration risk. For US Treasury bonds, that is pretty much the only risk.For other types of bonds, there are other risks. Corporate bonds can and do default. They haven’t in a while, but they will someday. More importantly, the price of these bonds will decline as the market perceives companies to be less credit worthy. In the investment community, this is known as spread widening. The spread between corporate interest rates and Treasury interest rates will widen.In the last credit meltdown in 2015, led by energy credits, high yield spreads widened to about 700 basis points over Treasurys.That’s a bunch of gobbledygook to many people. What does that mean to me as an investor in a bond mutual fund?Well, if you own a high-quality investment grade corporate bond fund, the most it can probably go down because of credit concerns is about 5-7%. If it is a fund that is concentrated in BBB credits, perhaps a bit more.If you own a high yield bond fund that focuses on BB credits, your downside is probably capped at around 20%. If it owns mostly speculative CCC credits, you could lose 30% or more. This is also true for convertible bond funds.With international bonds, it is very much dependent on the situation, but emerging market bonds tend to be very economically sensitive and the downside could be large if we have a global recession.Mortgage-backed securities are pretty boring most of the time, except in 2008, or if interest rates rise rapidly.One day, municipal bonds will be very, very exciting. Although people have been saying that for 15 years or more.Now that we know the risks, let’s build a portfolio.

First Things First

What is your income? If it is north of $300K-$400K, you will want to consider owning lots of municipal bonds. Yes, I’ve heard all the arguments against munis—unfunded public pensions leading to muni bond defaults, blah blah blah. Maybe that is an issue in the next recession. Maybe not.For the rest of the portfolio, you will want a mix of Treasury and corporate bonds. With yields this low, people are tempted to massively overweight corporates. I understand that sentiment.By the way, one thing that is poorly understood about investment grade corporate bonds is that they are also very sensitive to interest rates. When Apple issued their first bonds back in 2013, people were surprised to see 10% of the value evaporate in a month—all on duration.High yield bonds have a little exposure to interest rates (especially with the low coupons these days), but not much. Mostly, they are correlated with stocks.So:Treasury—all interest rate risk.Investment grade corporates—some credit risk, some interest rate risk.High yield corporates—mostly credit risk (they behave like stocks).I don’t have a rubric here for what you should do, but your instincts on this—to overweight corporates to get more yield—are probably bad. This is actually the wrong time to be reaching for yield.It’s the right time to be reaching for safety. Had you done so 8 months ago, you would be pretty happy today. Treasury bonds are up over 20% this year.

Maturity Matching

The other thing you need to consider when building a bond portfolio is the length of maturity you want.Short-term bonds = less interest rate risk and less credit risk.Long-term bonds = more interest rate risk and more credit risk.You could just do it naively and pick a range of maturities. I’m not going to talk about it here, but you might want to do some research on bond laddering, the idea of which is to spread your risk along the interest rate curve.The school of thought is that you want to match your bond maturities with your liabilities.If you are going to retire in 30 years, you probably want 30 year bonds. If you are going to send a child to college in 10 years, you probably want 10 year bonds.If you have a view on interest rates, that can help. For example, I think that the Fed is likely to cut rates to zero and beyond. This would make shorter maturities more attractive.Once you put together your portfolio, you can figure out the weighted average maturity. A typical bond portfolio has a weighted average maturity of 5-7 years. If you are worried about interest rates or credit, you can make it shorter, or vice versa.

More Art Than Science

The key here is diversification. A portfolio full of municipal bonds will expose you to, well, the idiosyncratic risk that muni credit blows up.And yes, this is more art than science.And I know it’s not straight-forward. One reader said this recently: “I went into bonds hoping to ease up on time needed on my portfolio, but now I think shares are simpler!”He’s not wrong.But the bond market is much larger than the stock market. For many reasons, it is not clever to avoid it altogether.

In recent economic downturns, the United States has been more willing than normal to cooperate with China to try to spur a global recovery. So, although the Sino-American trade dispute continues to escalate, a US recession later this year or in 2020 may help to ease bilateral tensions.

Shang-Jin Wei

NEW YORK – The recent inversion of the yield curve in the United States – with the interest rate on ten-year US government bonds currently lower than that on short-term bonds – has raised fears of a possible US recession later this year or in 2020. Yet, paradoxically, a downturn in America could help to improve bilateral economic relations with China and cool the two countries’ escalating trade dispute.Recent history offers grounds for such predictions. True, by reducing import demand, US recessions normally have a negative impact on economies with a high trade-to-GDP ratio, including China. However, in recent downturns, the US also has been more willing than normal to cooperate with China in order to try to spur recovery.During the last major US recession in 2008-10, for example, China appeared to be the only major economy able and willing to boost global demand. Partly as a result of this, Sino-American ties improved, and the US even advocated giving China a greater voice in international bodies such as the International Monetary Fund and the G20.Similarly, US-China relations were at a low ebb in mid-2001, following a mid-air collision of a US reconnaissance plane and a Chinese fighter jet over the South China Sea, which resulted in the death of the Chinese pilot and the capture of the American crew. But after the September 11, 2001, terrorist attacks suddenly darkened the US economic outlook, US-China economic ties improved.Unlike its predecessors, US President Donald Trump’s administration may not have international cooperation in its DNA. But, tellingly, Trump initiated the current tariff war when the US economy was somewhat overheated, partly as a result of the aggressive tax cut that he pushed through Congress in late 2017. Frictions with America’s trading partners, which many economists believe are damaging both the US and the global economy, may in fact be helping to cool down the US economy. But Trump’s stance on China may soften, should a recession materialize. Two factors could derail this possibility. First, China may be unable or unwilling to provide economic stimulus. The Chinese government’s debt-to-GDP ratio is higher today than it was a decade ago, when the authorities rolled out an aggressive stimulus package to offset weakening export demand in the wake of the global financial crisis. That fact would seem to limit the government’s capacity to pursue an expansionary fiscal policy in the event of a US recession.

Even so, China’s debt-to-GDP ratio is still much lower than that of most other large economies, giving the government some room for additional fiscal stimulus in an economic emergency. Moreover, although the People’s Bank of China is more cautious about injecting liquidity at will, the relatively high reserve ratio the PBOC imposes on commercial banks suggests that it would have significant firepower should the need arise.The second risk factor is the 2017 US corporate tax cut, which enlarges America’s trade deficit with China, further damaging bilateral relations.America’s overall trade deficit reflects a shortage of US national savings relative to investment. By causing US government debt to increase by an additional $1-2 trillion over the next decade, the 2017 tax cut will make the government’s savings rate substantially more negative. Because it is unlikely to be offset by a decrease in national investment or a large enough increase in private-sector savings, the tax cut has contributed to a higher US trade deficit. The overall deficit this year is projected to be larger than in 2017 or 2018, and this trend is set tocontinue.This strongly suggests that the US trade deficit with China will increase. With US politicians and much of the media evidently failing to recognize the connection between Trump’s tax cut and the growing US trade deficit, they will most probably think the Chinese are doing something pernicious. For this reason, I have long argued that the US tax cut is a significant structural impediment to reducing America’s trade deficit with China (and with many other trading partners), and therefore a likely source of tension over the next few years.Nonetheless, the US trade deficit (as a share of GDP) typically decreases as the American economy weakens, because import demand tends to fall as well. A US recession may, therefore, somewhat moderate the negative impact of the Trump tax cut on the trade deficit.More important, the Chinese government has itself cut taxes aggressively since the end of 2018, reducing value-added tax (from 17% to 16% and then to 13%), lowering the corporate income-tax rate, and decreasing the social-security contribution rate for employers.Because these recent tax cuts are unlikely to be offset by lower investment or a sufficiently large increase in private savings, China’s national savings rate will most probably decrease. As a result, the country’s overall trade surplus – which reflects its excess of savings over investment – probably will be far smaller in 2020, and may even slide into deficit in one or two quarters. Although China will almost certainly still run a bilateral trade surplus with America next year because of the effect of the US tax cut, the imbalance will be much smaller than otherwise would have been the case.While a US recession would be bad news for the global economy in terms of a direct demand channel, it could help to normalize the troubled relations between America and China. If the world’s two largest economies get along better, businesses and investors everywhere will breathe a sigh of relief. This may turn out to be a silver lining in the next US recession.

Shang-Jin Wei, former Chief Economist of the Asian Development Bank, is Professor of Finance and Economics at Columbia University and a visiting professor at the Australian National University.

Fears over recession are once again stalking markets, but many investors and analysts are more worried about a deeper, more structural shift: that the world economy is succumbing to a phenomenon dubbed “Japanification”.Japanification, or Japanisation, is the term economists use to describe the country’s nearly 30-year battle against deflation and anaemic growth, characterised by extraordinary but ineffective monetary stimulus propelling bond yields lower even as debt burdens balloon.Analysts have long been concerned that Europe is succumbing to a similar malaise, but were hopeful that the US — with its better demographics, more dynamic economy and stronger post-crisis recovery — would avoid that fate. But with US inflation stubbornly low, the tax-cut stimulus fading and the Federal Reserve now having cut interest rates for the first time since the financial crisis, even America is starting to look a little Japanese. Throw in the debilitating effect of ongoing trade tensions and some fear that Japanification could go global.“You can get addicted to low or negative rates,” said Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management in New York. “It’s very scary. Japan still hasn’t gotten away from it . . . The world is in a very precarious spot.”The primary symptom of spreading Japanification: the rise of negative-yielding debt, which has accelerated over the summer. There is now more than $16tn worth of bonds trading with sub-zero yields, or more than 30 per cent of the global total.Japan is the biggest contributor to that pool, accounting for nearly half the total, according to Deutsche Bank. But the entire German and Dutch government bond markets now have negative yields. Even Ireland, Portugal and Spain — which just a few years ago were battling rising borrowing costs triggered by fears they might fall out of the eurozone — have seen big parts of their bond markets submerged below zero.As a result, the US bond market is no longer the best house in a bad neighbourhood: it is pretty much the only house still standing. US debt accounts for 95 per cent of the world’s available investment-grade yield, according to Bank of America.The US economy continues to expand at a decent pace, with strong consumption offsetting a weaker manufacturing sector. Even inflation has ticked up a little. But some economists fret that a manufacturing contraction will inevitably affect spending, so forecasts have been slashed for this year and next. Some even fear a recession may be looming.“Black-hole monetary economics — interest rates stuck at zero with no real prospect of escape — is now the confident market expectation in Europe and Japan, with essentially zero or negative yields over a generation,” Larry Summers, the former Treasury secretary, noted last weekend. “The United States is only one recession away from joining them.”

He added: “Call it the black-hole problem, secular stagnation, or Japanification, this set of issues should be what central banks are worrying about.”

The global economy’s darkening outlook was certainly a major topic at last week’s annual central bankers’ jamboree at Jackson Hole. There, mounting trade tensions and the harsh reality of the limited powers of monetary policy to boost growth cast a pall over discussions.

“Something is going on, and that’s causing . . . a total rethink of central banking and all our cherished notions about what we think we’re doing,” James Bullard, president of the St Louis Federal Reserve, told the Financial Times. “We just have to stop thinking that next year things are going to be normal.”

Most analysts and investors remain optimistic that a US recession can be averted, given that the Fed has shown its willingness to cut interest rates to support growth. Instead, a scenario something akin to Japan’s looks more likely, judging from still-elevated stock prices and interest rate futures. While this might appear more benign than a full-blown downturn, the implications are far from positive.

For one, it might mean that bond yields are going to stay lower for much longer. This might be good news for borrowers, but as Japan showed, persistently low rates do not necessarily invigorate economic growth.And for long-term investors, such as pension funds and insurers that depend on a certain return from fixed-income instruments, low rates can present a lot of difficulties. It is particularly problematic for “defined benefit” pension schemes, for example, which calculate the value of their long-term liabilities using high-grade average bond yields. When yields fall, pension providers’ expected returns dim, their funding status deteriorates and they have to set aside more money. The pension deficit of companies in the S&P 1500 index rose by $14bn in July to $322bn largely because of falling bond yields, according to Mercer. In the UK it rose £2bn to £51bn for FTSE 350 companies. And that was even before August’s big tumbles in bond yields.Nor is the prospect of Japanification an appetising one for investments outside the bond market, notes John Normand, a senior strategist at JPMorgan. “The prospect of broader, sustainable Japanisation when growth, inflation and bond yields are already depressed shouldn't comfort anyone,” he said. “When Japanisation is shorthand for an anaemic business cycle, credit and equity investors should question the earnings outlook, recalling that Japanese equities underperformed bonds for most of the country's ‘lost decade’.”

This research post continues our effort to keep investors aware of the risks and shifting capital opportunities that are currently taking place in the global markets. We started in PART I of this article by attempting to highlight how shifting currency valuations have played a very big role in precious metals pricing and how these currency shifts may ultimately result in various risk factors going forward with regards to market volatility. Simply put, currency pricing pressures are likely to isolate many foreign markets from investment activities as consumers, institutions and central governments may need more capital to support localized economies and policies while precious metals continue to get more and more expensive.One of the primary reasons for this shift in the markets is the strength of the US Dollar and the US Stock Market (as well as the strength in other mature economies). The capital shift that began to take place in 2013-2014 was a shift away from risk and towards safer, more mature economic sources. This shift continues today – in an even more heightened environment. The volatility we are seeing in the US and foreign markets is related to this shift taking place as well as the currency valuation changes that continue to rattle the global markets.US Dollar Index Weekly Chart

It is our opinion that, at some point, the support levels in foreign markets may collapse while the US and major mature global economies become safe-havens for assets. When this happens, we’ll see the US Dollar rally even further which will push many foreign currencies into further despair. The overall strength of the US Dollar is being supported by this continued capital shift and the way that global assets are seeking safety and security. The same thing is happening in precious metals.

We believe the current setup in the US markets is indicative of a breakout/breakdown FLAG/Pennant formation. We believe this current setup should prompt a very volatile price swing in the markets over the next 3 to 6+ months which may become the start of a broader event playing out in the foreign markets. How this relates to precious metals is simply – more fear, more greed, more uncertainty equals a very strong rally in precious metals over the next 12+ months.

Dow Jones Index Chart

This Dow Jones chart highlights what we believe is a very strong Resistance Channel that needs to be broken if the US stock market is going to attempt to push higher in the future. You can also see the BLUE lines we’ve drawn on this chart that sets up the FLAG/Pennant formation. Although price broke through the lows of the FLAG/Pennant formation, we still consider it valid because it confirms on other US major indexes. Should the Dow Jones fail to move above the previous price high, near early July 2019, then we believe the Resistance Channel will reject price near current levels and force it lower (filling a recent gap and targeting the $25,500 level or lower).

Custom Volatility Index Chart

Our Custom Volatility Index chart shows a similar type of setup. Price weakness is evident near the upper channel level of this chart. This chart is very helpful for our research team because it puts price peaks and troughs into perspective within a “channeling-type” of rotating range. You can see that previous major price peaks have always settled above 16 or 17 on this chart. And previous major price bottoms have always settled below 7 or 8 on this chart. The current price volatility level is just above 13 – just entering the weakness zone in an uptrend. If price were to fail near this level, a move toward 8 would not be out of the question. We just have to watch and see how price reacts over the next few weeks to determine if these weakness channels will push price lower.

Gold Monthly Chart

If our research is correct, the entire move higher in precious metals, originating near the bottom in December 2015, is a complex wave formation setting up a WAVE 1 upside move. This complex wave formation is likely to consist of a total of 5 price waves (as you can see from the chart below) and will likely end with Gold trading well above the $2000 price level near or before June 2020.

If this analysis is correct, we are about to enter a very big, volatile and potentially violent price move in the global markets that could rip your face off if you are not prepared.

CONCLUDING THOUGHTS

This BEAST of a market is about to explode as we’ve highlighted by this research and these charts. It may start ripping our faces off in less than 30 days or it could take longer. One thing is for sure, the global markets are set up for something big and precious metals are beating our foreheads saying “hey, look over here!! This is where risk is trailing into as the markets continue to set up for this volatile price move!!”.

If you know the other and know yourself, you need not fear the result of a hundred battles.

Sun Tzu

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.